GUIDELINE ASSETS ADEQUACY REQUIREMENTS PROPERTY AND CASUALTY INSURANCE October 2004
Guideline Subject: Branch adequacy of assets test (BAAT) for foreign property and casualty insurance companies Date: October 2004 Insurers of Foreign Property and Casualty Insurance Companies (Foreign Insurers) are required to comply with assets adequacy standards established by the Autorité des marchés financiers ( AMF ). This guideline sets out the framework for Foreign Insurers using a risk-based formula for the minimum BAAT margin to be maintained by foreign property and casualty insurance companies in Canada, and defines the assets that are available to meet the minimum standard. The BAAT determines the minimum assets required and not necessarily the optimum assets required. This BAAT reflects the guideline issued by the Office of the Superintendent of Financial Institutions in December 2002. Although the BAAT excludes amounts related to marine business, additional information from Foreign Insurers that underwrite this insurance class may be requested by the AMF since the AMF s solvency requirements are based on all insurance classes offered through them. October 2004 Page 1
TAB BAAT FOR FOREIGN P&C INSURANCE COMPANIES Overview...1 Margin Required for Assets...2 Margin Required for Insurance Policy Liabilities...3 Margin Required for Off-Balance Sheet Exposures...4 Worksheet - Margin Required: Accident and Sickness Business...Appendix A-1 Worksheet - Margin Required: Off-Balance Sheet Exposures...Appendix A-2 Margin Required: Mortgage Insurance... Appendix B October 2004 Page 2
TAB 1 OVERVIEW Branch Adequacy of Assets Test (BAAT) for Foreign P&C Insurance Companies This Tab provides an overview of the BAAT for Insurers of Foreign P&C Insurance Companies (Foreign Insurers) that hold a licence to transact property and casualty insurance in Québec. More detailed information on specific components of the calculation is contained under subsequent tabs. For BAAT purposes, all amounts are net of marine business. 1 Risk-Based Framework The risk-based framework assesses the riskiness of assets, insurance policy liabilities, and offbalance sheet exposures, by applying varying factors. Foreign Insurers are required to meet a test of minimum Net Assets Available over Margin Required. Available Assets For BAAT purposes, Available Assets are calculated as follows: 1. Excess of Vested Assets over Net Liabilities. Net Liabilities is equal to Total Liabilities net of: Recoverables from Reinsurers; Other (allowable) Recoverables on Unpaid Claims; Unearned Commissions; and a specified portion of Deferred Policy Acquisition Expenses. This reduction for Deferred Policy Acquisition Expenses (DPAE) is equal to the sum of: a) 65% of the net of Deferred Commissions and Unearned Commission (if the net value is zero or negative, there is no adjustment for this item); and, b) 100% of Deferred Premium Taxes. 2. Receivables from Agents and Policyholders (including Brokers). 3. An amount to recognize changes in the market value of investments that are vested in trust (Investments - Adjustment to Market). The Adjustment to Market is determined by summing the amounts determined in a) and b) below: a) an amount for Investments in the vested assets account (other than Real Estate and Other Investments). This is determined by netting the excess for investments having a market value that exceeds their book value against the shortfall for investments having a market value that is less than their book value. A factor of 100% is assigned to a net shortfall to determine the reduction in the Adjustment to Market amount. A factor of 50% is assigned to a net increase to determine the increase in the Adjustment to Market amount. 1 The AMF allows foreign P&C insurance companies to complete the BAAT by excluding the marine insurance class so that they can file a single form with all regulators. However, at the request of the AMF, Foreign Insurers that underwrite marine business may be required to complete the BAAT with amounts related to this insurance class. October 2004 Page 3
Margin Required b) an amount for Real Estate and Other Investments in the vested assets account. This is determined by netting the total excess for Real Estate and Other Investments having a market value that exceeds their book value against the total shortfall for Real Estate and Other Investments having a market value that is less than their book value. A factor of 100% is assigned to a net shortfall to determine the reduction in the Adjustment to Market amount. A factor of 0% is assigned to a net increase. The BAAT margin requirement is the sum of amounts required for: 1. Assets (reference Tab 2). 2. Unearned Premiums and Unpaid Claims (Insurance Policy Liabilities reference Tab 3). 3. Catastrophe Reserves and Additional Insurance Policy Provisions (reference Tab 3). 4. Reinsurance Ceded to Unregistered Reinsurers (reference Tab 3). 5. Off-Balance Sheet Exposures (reference Tab 4). Minimum Requirements Foreign Insurers will be expected to maintain Net Assets Available equal to at least the minimum Margin Required. The AMF may prescribe a higher requirement, including for an individual Foreign Insurers, taking into account such factors as operating experience, diversification of the asset or insurance portfolios, and retention limits. Application The BAAT applies to Insurers of Foreign P&C Insurance Companies. Interpretation of Results The BAAT establishes the minimum margin requirement for a Foreign Insurers operating in Québec to protect its policyholders. It is one of several indicators that the AMF uses to assess financial condition and should not be used in isolation for ranking and rating insurers. October 2004 Page 4
TAB 2 MARGIN REQUIRED FOR ASSETS Description of Asset Risks... 2-1 Counterparty Risk... 2-2 Asset Factors... 2-3 Treatment of Movable Hypothecs and Guarantees... 2-4 October 2004 Page 5
TAB 2-1 DESCRIPTION OF ASSET RISKS The margin required for on-balance sheet assets covers the potential losses resulting from asset default and the related loss of income, and the loss of market value of equities and the related reduction in income. To determine the margin requirement for on-balance sheet assets, Foreign Insurers must apply a factor to vested and other admitted assets. The sum of these values gives the margin required for assets. October 2004 Page 6
TAB 2-2 COUNTERPARTY RISK This Tab applies to on-balance sheet assets (reference Tab 1) and to off-balance sheet exposures (reference Tab 4). The three rating categories used for assigning factors to on-balance sheet assets, off-balance sheet exposures or, where appropriate, movable hypothecs and guarantees are: 1. Government Grade Government obligations include securities issued by, loans made to, or securities or loans guaranteed by, and accounts receivable from: the federal government of Canada or an agent of the Crown; a provincial or territorial government of Canada or one of its agents; a municipality or school corporation in Canada; and, the central government of a foreign country where: the security is rated AAA or, if not rated, the long-term sovereign credit rating of that country is AAA. 2. Investment Grade A security is treated as Investment Grade if its rating (excluding securities that are included in the Government Grade category) meets or exceeds the rating listed in the table below. If a rating is not available, or where the rating of the security, or guarantor, is less than the rating listed in the table, it will be assigned a Not-Investment Grade factor. A Foreign Insurer wishing to use the rating of another rating agency should seek the approval of the AMF. October 2004 Page 7
Asset/guarantor rating Rating Agency Commercial Paper Bonds & Debentures Preferred Shares (at least as high as) Moody s Investor P-1 A AA Service Standard & Poor s A- A AA Corporation Dominion Bond R-1 (low) A Pfd-2 Rating Service Canadian Bond Rating Service 2 A-1 Low A P-2 3. Not-Investment Grade This includes any item not included in the Government Grade or Investment Grade categories. In the case of an off-balance sheet exposure or asset, backed by a movable hypothec or guarantee (reference Tab 2-4), the long-term issuer credit rating or, in the case of a government, the long-term sovereign risk rating, of the guarantor is used to determine the risk category. In all cases, when a credit rating is not available, the relevant Not-Investment Grade factor is applied. 2 To be used only where the ratings of Canadian Bond Rating Services have not been formally withdrawn and superseded by a Standard and Poor s rating. October 2004 Page 8
TAB 2-3 ASSET FACTORS 0% Factor Cash. Obligations 3 of federal, provincial, territorial and municipal governments, and school corporations in Canada. Obligations of agents of the federal, provincial or territorial governments in Canada whose obligations are, by virtue of their enabling legislation, direct obligations of the parent government. Obligations of AAA-rated central governments and central banks, or obligations of organizations with the guarantee of the central government. Obligations backed by a Government Grade guarantor, including residential mortgages insured under the National Housing Act (NHA) or equivalent provincial mortgage insurance program, and NHA mortgage-backed securities that are guaranteed by the Canada Mortgage and Housing Corporation. Instalment Premiums (not yet due). 0.5% Factor Term deposits, bonds, and debentures (including commercial paper), rated Investment- Grade, that mature or are redeemable in less than one year. Unearned Premiums recoverable from registered insurers (reference Tab 3-2). 2% Factor Term deposits, bonds, and debentures (including commercial paper), rated Investment Grade, that mature or are redeemable in one year or more. Investment income due and accrued. Unpaid Claims and adjustment expenses recoverable from registered insurers (reference Tab 3-2). 3 Includes securities, loans and accounts receivable. October 2004 Page 9
4% Factor Term deposits, bonds, and debentures (including commercial paper), rated Not- Investment Grade, that mature or are redeemable in less than one year. Investment Grade preferred shares. First mortgages on one- to four-unit residential dwellings. Accounts Receivable, outstanding less than 60 days, from Policyholders, Agents, Brokers, Branches and Affiliated Companies, including Instalment Premiums and other Accounts Receivable. 8% Factor Term deposits, bonds, and debentures (including commercial paper), rated Not- Investment Grade, that mature or are redeemable in one year or more. Accounts Receivable, outstanding 60 days or more, from Policyholders, Agents, Brokers, Branches and Affiliated Companies, including Instalment Premiums. Real estate for a Foreign Insurer s own use. Commercial mortgages. 10% Factor Other loans. 15% Factor Common shares. Preferred shares rated Not-Investment Grade. Investments in real estate (not for Foreign Insurer s own use). Mortgages secured by undeveloped land (e.g. construction financing), other than land used for agricultural purposes or for the production of minerals. A property recently constructed or renovated will be considered as under construction until it is completed and 80% leased. Other Investments (per page 40.05 of P&C-2 Instructions, including investments other than term deposits, bonds and debentures, loans, shares, or investment in real estate). Other (allowable) Recoverables on Unpaid Claims, including Salvage and Subrogation assets, to the extent permitted as Available Assets. October 2004 Page 10
Variable Factors Investments in securitized assets, mutual funds or other similar assets must be broken down by type of investment (bond, preferred shares, etc.), reported on the applicable line, and assigned the appropriate factor relating to the investment. If these investments are not reported on a prorated basis, then the factor of the riskiest asset being securitized, or held in the fund, is assigned to the entire investment. General Where information is not available to determine the grade of the counterparty, the counterparty is deemed to be Not-Investment Grade. Where information is not available to determine the redemption/maturity of an asset, Foreign Insurers must use the category with the highest factor for that asset (e.g., use the deposits, bonds and debentures, expiring or redeemable in more than one year category where that information is not available for a particular asset). New assets, not currently listed, will be categorized according to their inherent riskiness. October 2004 Page 11
TAB 2-4 MARGIN REQUIRED FOR MOVABLE HYPOTHECS AND GUARANTEES This Tab applies to both on-balance sheet assets and to off-balance sheet exposures. Movable hypothecs Recognition of movable hypothecs in reducing the margin required for on-balance sheet assets, or off-balance sheet exposures, is limited to cash or securities meeting the Government Grade or Investment Grade criteria (reference Tab 2-2). Where a rating is not available for the onbalance sheet asset, off-balance sheet exposure, or counterparty where applicable, no reduction in the required margin is permitted. Any movable hypothec must be held throughout the period for which the asset is held or for which the exposure exists. Only that portion of an obligation that is covered by an eligible movable hypothec will be assigned the weight given to the movable hypothec. Where the on-balance sheet asset or off-balance sheet exposure, against which the movable hypothec is held, is marked-to-market, the movable hypothec should also be marked-to-market. Guarantees Investments (principal and interest) or off-balance sheet exposures that have been explicitly, irrevocably and unconditionally guaranteed by a guarantor whose long-term issuer credit rating or, in the case of a government, the long-term sovereign credit rating, satisfies the Government Grade or Investment Grade rating criteria, may attract the factor allocated to a direct claim on the guarantor where the effect is to reduce the risk. Guarantees provided by a parent or an affiliate are not eligible for this treatment on the basis that guarantees within a corporate group are not considered to be a substitute for the required margin. Where a rating is not available for the investment, off-balance sheet exposure, or guarantor where applicable, no reduction in the required margin is permitted. To be eligible, guarantees should cover the full term of the instrument and be legally enforceable. Where the recovery of losses on a loan, financial lease agreement, security or off-balance sheet exposure is partially guaranteed, only the part that is guaranteed is to be weighted according to the factor of the guarantor (see examples below). October 2004 Page 12
Example One: On-Balance Sheet Asset (reference Tab 2) To record a $100,000 Investment Grade bond due in 10 years that has a Government Grade guarantee of 90%, the insurer would report a book value of $90,000 ($100,000 x 90%) on the Government Grade line and a book value of $10,000 ($100,000 - $90,000) on the Investment Grade line on page 30.81 under Term Deposits, Bonds and Debentures, expiring or redeemable in more than one year. The Margin Required on the Government Grade line is $0 ($90,000 x 0.0%). The Margin Required on the Investment Grade line is $200 ($10,000 x 2.0%) for a total margin requirement of $200. An example of the calculation, assuming no other balance sheet items, is provided in the chart below. Factor (%) Book Value Margin Required Investments: Term Deposits, Bonds and Debentures: - Expiring or redeemable in more than one year: Government Grade 0.0% $90,000 $0 Investment Grade 2.0% $10,000 $200 Not-Investment Grade 8.0% Total $100,000 $200 Example Two: Off-Balance Sheet Exposure (reference Tab 4) To record a $3,000 Structured Settlement rated Not-Investment Grade, backed by a movable hypothec or a guarantee of $2,000 from an Investment Grade counterparty, the insurer would report a Possible Credit Exposure of $3,000 and a Movable Hypothec and Guarantees of negative $2,000 on the Not Investment Grade line, and a Movable Hypothec and Guarantees of $2,000 on the Investment Grade line under Structured Settlements on Appendix A-2. The Margin Required on the Not Investment Grade line is $20 (($3,000 - $2,000) x 50% x 4%). The Margin Required on the Investment Grade line is $5 ($2,000 x 50% x.5%) for a total margin requirement of $25. An example of the calculation, assuming no other off balance sheet exposures, is provided in the chart below. Possible Credit Exposure (01) Movable Hypothec and Guarantees (02) Credit Conversion Factor (%) (03) Factor (%) (04) Margin Required (05) Structured Settlements: Government Grade Investment Grade $2,000 50% 0.5% $5 Not Investment Grade $3,000 ($2,000) 50% 4.0% $20 Total $25 October 2004 Page 13
TAB 3 MARGIN REQUIRED FOR INSURANCE POLICY LIABILITIES (EXCLUDES MARINE BUSINESS) Description of Risks for Insurance Policy Liabilities... 3-1 Margins for Unearned Premiums and Unpaid Claims... 3-1 Catastrophes... 3-1 Reinsurance Recoverables... 3-2 October 2004 Page 14
TAB 3-1 DESCRIPTION OF RISKS FOR INSURANCE POLICY LIABILITIES This risk component reflects the insurer s risk profile by individual classes of insurance and results in specific margin requirements on insurance policy liabilities. The risk associated with insurance policy liabilities is divided into three parts: variation in claims provisions (Unpaid Claims); possible inadequacy of provisions for Unearned Premiums; and occurrence of catastrophes (Earthquake and Other). Note that, for Foreign Insurers, insurance policy liabilities exclude Marine business. MARGINS FOR UNEARNED PREMIUMS AND UNPAID CLAIMS Given the uncertainty that balance sheet provisions will be sufficient to cover the anticipated liabilities, margins are added to cover the potential shortfall. The margins establish a balance between the recognition of varying risks associated with different classes of insurance and the administrative necessity to minimize the test s complexity. From the AMF s perspective, these margins are included to take into account possible abnormal negative variations in the amounts calculated by actuaries, given the fact that the margins added by actuaries in their valuation are primarily intended to cover expected variations. Margins on Unpaid Claims and Unearned Premiums are applied to the net amount at risk (i.e., net of reinsurance, Salvage and Subrogation, and Self Insured Retentions) by class of insurance. The Unearned Premiums margin is applied to the greater of the net Unearned Premiums or 50% of the net written premiums in the last 12 months. The margins are as follows: Class of Insurance Margin on Unearned Premiums Margin on Unpaid Claims Personal property & commercial property 8% 5% Automobile - Liability & personal accident 8% 10% Automobile - Other 8% 5% Liability 8% 15% Accident and Sickness Appendix A-1 Appendix A-1 Mortgage (federal companies only) Appendix B 15% All others 8% 15% October 2004 Page 15
CATASTROPHES Earthquake Refer to the AMF Earthquake Exposure Sound Practices guideline. Nuclear Foreign Insurers issuing nuclear or atomic risk policies are required to record an additional provision of 100% of net premiums written, less commissions. In the absence of meaningful statistical data on the severity and frequency of losses, the AMF considers it appropriate for insurers to reverse this provision after twenty years. Mortgage Insurance Refer to the Additional Policy Provisions section of Appendix B. October 2004 Page 16
TAB 3-2 REINSURANCE RECOVERABLES Registered Reinsurers The risk of default for recoverables from reinsurers arises from both credit and actuarial risk. Credit risk relates to the risk that the reinsurer will fail to pay the insurer what it is owed. Actuarial risk relates to the risk associated with assessing the amount of the required provision. The factor applied to recoverables from registered reinsurers is treated as a combined weight under the BAAT, reflecting both the credit risk and the risk of variability or insufficiency of Unpaid Claims and Unearned Premiums. A 2% factor is to be applied to Unpaid Claims recoverable from registered reinsurers and a 0.5% factor is to be applied to Unearned Premiums recoverable from registered reinsurers. Unregistered Reinsurers Recoverables from Unregistered Reinsurers have a Margin Required amount equal to the amount calculated on page 70.39 of the P&C-2. This calculation will lead to Margin Required of up to 110% of the applicable amounts on the balance sheet, and is reported on the Reinsurance Ceded to Unregistered Insurers line on Page 30.80. October 2004 Page 17
TAB 4 Margin Required for Off-Balance Sheet Exposures Description of Risks for Off-Balance Sheet Items... 4-1 Possible Credit Exposure... 4-2 Credit Conversion Factors... 4-3 Factors... 4-4 October 2004 Page 18
TAB 4-1 DESCRIPTION OF RISKS FOR OFF-BALANCE SHEET ITEMS This Tab applies to counterparty risk exposures not covered by the treatment for on-balance sheet items. The risk to a Foreign Insurer associated with off-balance sheet activities, the amount of margin required to be held against this risk, is: 1. The value of the instrument (Possible Credit Exposure; reference Tab 4-2) at the reporting date; 2. Less: the value of eligible movable hypothec or guarantees (Movable Hypothecs and Guarantees; reference Tab 2-4); 3. Multiplied by: a factor reflecting the nature and maturity of the instrument (Credit Conversion Factor; reference Tab 4-3); 4. Multiplied by: a factor reflecting the risk of default of the counterparty to a transaction (Factors; reference Tab 4-4). Refer to Appendix A-2, Worksheet for Margin Required for Off-Balance Sheet Exposures. October 2004 Page 19
TAB 4-2 POSSIBLE CREDIT EXPOSURE The possible credit exposure related to off-balance sheet items varies depending on the type of off-balance sheet instrument selected. Structured Settlements The possible credit exposure for a Structured Settlement is the current cost of the instrument. Instruments included in this Tab are primarily Type 1 Structured Settlements that are not recorded as liabilities on the balance sheet. For details on the types of Structured Settlements, refer to Special Topics, section IV of the Instructions to the P&C-2, and to Guideline D5: Accounting for Structured Settlements. Letters of Credit The possible credit exposure for a Letter of Credit is the face value of the instrument. Letters of Credit (LOCs) may include, for example: i. LOCs serving as direct credit substitutes backing financial claims where the risk of loss to the Foreign Insurer is directly dependent on the creditworthiness of the counterparty. ii. LOCs acting as transaction-related contingencies associated with the ongoing business activities of a counterparty. The risk of loss to the reporting institution depends on the likelihood of a future event that is independent of the creditworthiness of the counterparty. Derivatives The possible credit exposure for derivatives is the positive replacement cost (obtained by marking to market ) plus an amount for potential future credit exposure (an add-on factor). Derivatives include forwards, futures, swaps, purchased options, and other similar contracts. Insurers are not exposed to credit risk for the full face value of these contracts (notional principal amount); only to the potential cost of replacing the cash flow (on contracts showing a positive value) if the counterparty defaults. Instruments traded on exchanges are excluded where they are subject to daily receipt and payment of cash variation margins. The possible credit exposure depends on the maturity of the contract and the volatility of the underlying instrument. It is calculated by adding: i. the total replacement cost (obtained by "marking to market") of all contracts with positive value; and October 2004 Page 20
ii. an amount for potential future credit exposure (or "add-on"). This is calculated by multiplying the notional principal amount by the following factors. Derivative Add-On Factors Residual Maturity Interest Rate Exchange Rate Equity Other Instruments One year or less 0.0% 1.0% 6.0% 10.0% Over one year 0.5% 5.0% 8.0% 12.0% For contracts that are structured to settle outstanding exposures following specified payment dates, and where the terms are reset so that the market value of the contract is zero on these specified dates, the residual maturity is considered to be the time until the next reset date. In the case of interest rate contracts with remaining maturities of more than one year that also meet the above criteria, the add-on factor is subject to a floor of 0.5%. The notional principal amount is: the stated notional amount, except where the stated notional amount is leveraged or enhanced by the structure of the transaction. In these cases, insurers must use the actual or effective notional amount when determining potential future exposure; 4 nil, where the credit exposure on single currency floating/floating interest rate swaps would be evaluated solely on the basis of their marked-to-market value; or for contracts with multiple exchanges of principal, the sum of the remaining payments. Contracts not covered by columns 2 4 in the above table are to be treated as other instruments for the purpose of determining the add-on factor. Other Off-Balance Sheet Items This section includes any other off-balance sheet items not covered above. Some examples are provided below. Commitments A commitment involves an obligation (with or without a material adverse change or similar clause) of the Foreign Insurer to fund its customer in the normal course of business, should the customer decide to acquire such funding and seek to draw down the commitment. This includes, as the case may be: 4 For example, if a stated notional amount is based on a specified parameter (e.g., LIBOR), but has actual payments calculated at two times that parameter, the amount for potential future credit exposure is based on twice the stated notional amount. October 2004 Page 21
1. extending credit in the form of loans or participations in loans, lease financing receivables, mortgages, letters of credit, guarantees or loan substitutes; or 2. purchasing loans, securities, or other assets. Normally, commitments are recognized through a contract (written) or agreement and involve a commitment fee or some other form of consideration. The maturity of a commitment should be measured from the date when the commitment was accepted by the customer (regardless of whether the commitment is revocable or irrevocable, conditional or unconditional) until the earliest date on which: 1. the commitment is scheduled to expire, or 2. the insurer can, at its option, unconditionally cancel the commitment. Repurchase and Reverse Repurchase Agreements A securities repurchase (repo) is an agreement whereby a transferor agrees to sell securities at a specified price and repurchase the securities on a specified date and at a specified price. Since the transaction is regarded as a financing for accounting purposes, the securities remain on the balance sheet. Given that these securities are temporarily assigned to another party, the factor accorded to the asset should be the higher of the factor of the security and the factor of the counterparty to the transaction (net of any eligible movable hypothec). A reverse repo agreement is the opposite of a repo agreement, and involves the purchase and subsequent sale of a security. Reverse repos are treated as collateralized loans, reflecting the economic reality of the transaction. The risk is therefore to be measured as an exposure to the counterparty. Where the asset temporarily acquired is a security that attracts a preferential factor, the asset would be recognized as collateral and the factor would be reduced accordingly. October 2004 Page 22
TAB 4-3 CREDIT CONVERSION FACTORS Separate credit conversion factors exist for each category of off-balance sheet item. For Letters of Credit and Other Off-Balance Sheet Items, the weighted average of the credit conversion factors, described below, for all of these instruments held by the Foreign Insurer, should be entered in the appropriate cell on the Worksheet for Off-Balance Sheet Exposures (Appendix A-2). 100% Factor Guarantees, letters of credit, or other equivalent irrevocable obligations serving as financial guarantees. Generally, these are considered direct credit substitutes where the risk of loss to the Foreign Insurer is directly dependent on the creditworthiness of the counterparty. Commitments that mature in one year or more, and the Foreign Insurer cannot cancel or withdraw the commitment at any time without notice and where their drawdown is certain. Derivatives such as forwards, futures, swaps, purchased options (including options purchased over the counter) and other similar derivative contracts, including: i) Interest rate contracts (single currency interest rate swaps; basis swaps; forward rate agreements and products with similar characteristics; interest rate futures; interest rate options purchased, and similar derivative contracts based on specific parameters such as indices); ii) Equity contracts (forwards; swaps; purchased options; and similar derivative contracts based on specific parameters such as indices); iii) Exchange rate contracts (gold contracts; cross-currency swaps; cross-currency interest rate swaps; outright forward foreign exchange contracts; currency futures; currency options purchased; and similar derivative contracts based on specific parameters such as indices); iv) Precious metals (except gold) and other commodity contracts (forwards; swaps; purchased options; and similar derivative contracts based on specific parameters such as indices, etc.); v) Other derivative contracts based on specific parameters such as indices (including Catastrophe Insurance Options and Futures). Forward Asset Purchases including a commitment to purchase a loan, security or other asset at a specified future date, usually on prearranged terms. October 2004 Page 23
Repurchase and reverse repurchase agreements. All other off-balance sheet items not reported elsewhere (provide details). 50% Factor Structured settlements that are not recorded as liabilities on the balance sheet (refer to Section IV, Special Topics of the P&C-2 and to Guideline D5: Accounting for Structured Settlements). Performance-related and non-financial guarantees such as performance-related standby letters of credit (e.g. representing obligations backing the performance of non-financial or specific commercial contracts or undertakings and not general financial obligations). Performance-related guarantees specifically exclude items relating to non-performance of financial obligations. Commitments that mature in one year or more, and the insurer cannot cancel or withdraw the commitment at any time without notice and where their drawdown is uncertain. 0% Factor Commitments that mature in less than one year and other commitments where the insurer has full discretion to unconditionally cancel or withdraw the commitment at any time without notice. 5 5 Other than any notice required under legislation or other court rulings that require notice. October 2004 Page 24
Tab 4-4 FACTORS Off-balance sheet exposures are assigned a factor ranging from 0% to 8.0%, subject to their counterparty risk rating (reference Tab 2-2). The factors to be applied are: 0% Factor Off-balance sheet items rated Government Grade. 0.5% Factor Structured Settlements rated Investment Grade. Letters of Credit rated Investment Grade. Derivatives rated Investment Grade. 2.0% Factor Other Off-Balance Sheet Items rated Investment Grade. 4.0% Factor Structured settlements not rated Government Grade or Investment Grade. Letters of Credit not rated Government Grade or Investment Grade. Derivatives not rated Government Grade or Investment Grade. 8.0% Factor Other Off-Balance Sheet Items not rated Government Grade or Investment Grade. October 2004 Page 25
BAAT APPENDIX A-1 Margin Required: Accident and Sickness Business Accident and Sickness requirements determined by actuaries in their valuations are primarily intended to cover expected variations in these requirements based on assumptions about mortality and morbidity. Margins on Unearned Premiums and Unpaid Claims for Accident and Sickness Insurance are included in the BAAT to take into account possible abnormal negative variations in actual requirements. The Unearned Premium margin is calculated by applying a factor to annual Earned Premiums. Generally, the factor varies with the length of the premium guarantee remaining. The Unpaid Claims margin is calculated by applying a factor to the Unpaid Claims experience relating to prior years. Generally, the factor varies with the length of benefit period remaining. This Appendix includes a worksheet for calculating the Margin Required for Accident and Sickness Business. Instructions for completing the worksheet are included in the section below. The total requirement calculated on the worksheet is included in the amount reported on line 22, Unearned Premiums/Unpaid Claims, of Page 30.80. INSTRUCTIONS FOR COMPLETING THE WORKSHEET Mortality/morbidity risk for accident and sickness insurance is the risk that assumptions about mortality and morbidity will be wrong. To compute the mortality/morbidity component, a factor is applied to the measure of exposure to risk. The resulting values are added to arrive at the Unearned Premium and Unpaid Claims margins requirement. The factors used in deriving the risk component vary with the guaranteed term remaining in the exposure measure. The measure of the exposure to risk is as follows: Risk Measure of Exposure Applicable Guaranteed Term Disability Income, New Claims Risk Annual net earned premiums Length of the premium guarantee remaining Disability Income, Continuing Claims Risk Disability income net reserves relating to claims of prior years Length of the benefit period remaining Accidental Death and Dismemberment Net amount at risk = the total net face amount of insurance less policy reserves (even if negative) Period over which the mortality cost cannot be changed (limited to the remaining period to expiry or maturity) October 2004 Page 26
1. Disability Income Insurance The additional risks associated with non-cancellable guaranteed premium business should be recognized. As well, increased volatility is characteristic of disability income insurance, as compared to medical and dental expense reimbursement business. Unearned Premium Margin The unearned premium component relates to claims arising from the current year's coverage, and includes the risks of incidence and claims continuance. The factor applied to the measure of exposure is as follows: Percentage of Annual Earned Premiums 6 Length of Premium Guarantee Remaining Individually Underwritten Other 12% 12% less than or equal to 1 year 20% 25% greater than 1 year, but less than or equal to 5 years 30% 40% greater than 5 years Unpaid Claims Margin The unpaid claims component covers the risk of claims continuance arising from coverage provided in prior years. The factor applies to disability income claim reserves related to claims incurred in prior years, including the portion of the provision for incurred but unreported claims. The factor applied to the measure of exposure is as follows: Duration of Disability Length of Benefit Period less than or greater than 2 years but greater than Remaining equal to 2 years less than or equal to 5 years 5 years 4.0% 3.0% 2.0% less than or equal to 1 year 6.0% 4.5% 3.0% greater than 1 year but less than or equal to 2 years 8.0% 6.0% 4.0% greater than 2 years or lifetime 6 For travel insurance, annual earned premiums should be considered revenue premiums. October 2004 Page 27
2) Accidental Death and Dismemberment To compute the components for Accidental Death and Dismemberment, the following factors are applied to the net amount at risk: Type Factor Guaranteed Term Remaining Participating Group 0.015% less than or equal to 1 year All other 0.030% All Nonparticipating Adjustable 0.030% All Individual All other 0.015% less than or equal to 1 year 0.030% greater than 1 year but less than or equal to 5 years 0.060% Greater than 5 years, whole life and all life insurance continued on disabled lives without payment of premiums Nonparticipating All 0.015% less than or equal to 1 year Group 0.030% greater than 1 year but less than or equal to 5 years 0.060% greater than 5 years, whole life, and all life insurance continued on disabled lives without payment of premiums For participating business without meaningful dividends, and participating adjustable insurance policies where mortality adjustability is not reasonably flexible, the factors for all other nonparticipating business should be used. If current premium rates are significantly less than the maximum guaranteed premium rates, the guarantee term used is that applicable to the current rates. Additional adjustments are accorded group insurance. They are as follows: - The above factors may be multiplied by 50% for any group benefit that carries one of the following features: 1) a "guaranteed no risk" 2) deficit repayment by policyholders or 3) "hold harmless" agreement where the policyholder has a legally enforceable debt to the insurer. - No component is required for "Administrative Services Only" group cases where the insurer has no liability for claims. Only "all cause" insurance policies solicited by mail should be included in this section for automobile and common carrier accidental death and dismemberment. Specific accident perils in respect of accidental death and dismemberment in insurance policies solicited by mail, and "free" coverages on premium credit card groups, should be included in the "Other Accident and Sickness Benefits" section. October 2004 Page 28
3) Other Accident and Sickness Benefits Unearned Premium Margin The component requirement is 12% of annual earned premiums. Unpaid Claims Margin The component requirement is 10% of the provision for incurred but unpaid claims relating to prior years. The use of prior years avoids a double component requirement for incurred but unpaid claims arising from coverage purchases by premiums paid in the current year. Special Policyholder Arrangements Group insurance deposits in excess of liabilities, excluding the liability for such deposits, may reduce the component requirement on any policy to a minimum of zero. Such deposits must be: made by policyholders; available for claims payment (e.g., claim fluctuation and premium stabilization reserves, and accrued provision for experience refunds); and returnable, net of applications, to policyholders on policy termination. October 2004 Page 29
BAAT APPENDIX A-2 Margin Required: Off-Balance Sheet Exposures As prescribed with the risk-based asset approach applied in other financial sectors, the BAAT adopts a margin requirement for risks to Branches associated with off-balance sheet activities (reference Tab 4). This Tab applies to all exposures not covered by the treatment for onbalance sheet items. BAAT Appendix A-2 may be used as the Worksheet for the margin required for off-balance sheet exposures. The total requirement calculated on the Worksheet is reported on line 28, Page 30.80 of the BAAT. The approach accounts for the fact that the face value of the off-balance sheet instrument does not necessarily reflect the amount related to the credit exposure. To determine the approximate exposure, the face value of the instrument net any movable hypothec or guarantee is multiplied by a credit conversion factor. A counterparty risk rating is then applied to the result (reference Tab 4-4). It should be noted that the approaches used to determine counterparty risk categories (reference Tab 2-2) and eligible movable hypothecs and guarantees with respect to off-balance sheet exposures are similar to the approach used with respect to on-balance sheet assets. For BAAT purposes, off-balance sheet exposures are divided into four types: 1) Structured settlements; 2) Letters of credit; 3) Derivatives; 4) Other off-balance sheet items. Credit conversion factors and risk factors used in completing BAAT Appendix A-2 are detailed in Tab 4. October 2004 Page 30
BAAT APPENDIX B Margin Required: Mortgage Insurance This Appendix replaces all existing memoranda on the subject of requirements for mortgage insurance policies on classes of loans defined in Section 2 of this Appendix. 1. Definitions In this Appendix, "commercial loan" means a loan on a property used primarily for commercial purposes; "conventional loan" means a loan where the ratio of the initial mortgage amount to the lower of the appraised value or sale price, as at the date of the loan, does not exceed 75%; "high-ratio loan" means a loan that is not a conventional loan; "home-ownership loan" means a loan on a residential property with one to four units (inclusive), without regard to owner occupation; "industrial loan" means a loan on a property used primarily for industrial purposes; "initial mortgage amount" in respect of a mortgage that is not a first mortgage, means the total amount of the outstanding balance of the first mortgage, and the amount of the other mortgage at the date of commencement of risk under the policy; "multiple residential loan" means a loan on a property with more than four units used primarily for residential purposes; "variable payment mortgage" means a mortgage on which the payments to be made by the borrower increase in some pre-determined manner and which the AMF has agreed may be included under this definition. October 2004 Page 31
2. Classes of Loans The following classes of loans are hereby defined: 1st Mortgages 2nd Mortgages Type of Property Conventional High Ratio Conventional High Ratio Variable Payment Mortgage Home-ownership HCI HH1 HC2 HH2 HV1 Multiple residential MC1 MH1 MC2 Commercial CCl CH1 CC2 Industrial IC1 IH1 IC2 Note that the first letter denotes the type of property. The second letter denotes the type of mortgage. The suffix denotes the ranking of the mortgage. 3. Mortgage Insurance Margin a) A Foreign Insurer must, in respect of its mortgage insurance business covered by this Appendix, maintain a mortgage insurance margin as stipulated below, adjusted for: i) various classes of mortgages by factors prescribed in paragraph (b); ii) various settlement options by factors prescribed in section 8; iii) the margin for commitments likely to result into insurance policies in the following 60 days; and iv) the investment income discount factor prescribed in paragraph (c). This margin replaces the unearned premium margin required in the BAAT. October 2004 Page 32
Completed Policy Duration in Years Mortgage Insurance Margin per $100 of Initial Mortgage Amount Homeownership Others 0 0.616 1.10 1 0.711 1.10 2 0.694 1.07 3 0.644 0.98 4 0.496 0.87 5 0.346 0.73 6 0.194 0.54 7 0.106 0.33 8 0.051 0.10 9 0.030 N.A. 10 N.A. N.A. The Others category consists of Multiple Residential, Commercial and Industrial loans. b) The following adjustment factors will apply to the mortgage insurance margin for various classes of mortgages: Class Factors HC1 HH1 Homeownership conventional 1st mortgages Maximum loan to value ratio up to 50%.04 Maximum loan to value ratio over 50% to 65%.08 Maximum loan to value ratio over 65% to 75%.10 Homeownership high ratio 1st mortgages Maximum loan to value ratio over 75% to 80%.30 Maximum loan to value ratio over 80% to 85%.60 Maximum loan to value ratio over 85% to 90%.90 Maximum loan to value ratio over 90% to 95% 1.20 MC1 Multiple residential conventional 1st mortgages 1.00 MH1 Multiple residential high ratio 1st mortgages 1.50 MC2 Multiple residential conventional 2nd mortgages 1.00 CC1 Commercial conventional 1st mortgages 1.00 CH1 Commercial high ratio 1st mortgages 1.50 CC2 Commercial conventional 2nd mortgages 1.50 IC1 Industrial conventional 1st mortgages 1.00 IH1 Industrial high ratio 1st mortgages 1.50 IC2 Industrial conventional 2nd mortgages 1.50 For homeownership second mortgages, the factor used should be 90% of the first mortgage factor. For homeownership variable payment mortgage, the factor used should be 110% of the non-variable payment factor. October 2004 Page 33
c) The above requirements will be adjusted by application of an investment income factor defined as under: The income factor = [1-2.5 (x -.05)] where x denotes the investment yield of the Foreign Insurer per unit of assets during the previous 12 months. The investment income factor cannot be less than 0.875. For the purposes of calculating the yield, the investment income will be calculated as Income (20.30.32.01) plus the share of net income (loss) of subsidiaries and affiliates (20.30.41.01) of the Annual Return, while assets are the Assets Available for BAAT Purposes or an equivalent amount. d) A Foreign Insurer must also maintain a margin on the basis prescribed herein in respect of commitments likely to result into policies in the following 60 days. As regards the balance of commitments, the Foreign Insurer will have to satisfy the AMF that margin would be available at the time when insurance policies are likely to be issued. Companies will be required to justify the factors used in the calculations. e) Notwithstanding anything to the contrary stated herein, the mortgage insurance margin required pursuant to this section must not be less than 0.15% of the initial mortgage amount on the total business of the Foreign Insurer. 4. Unearned Premiums a) A Foreign Insurer will maintain unearned premiums on the scales prescribed below: Unearned Premium Reserve as Per Cent of Single Premium Term of Policy in Years Completed Policy 5 or less over 5 and less over 10 and less over 15 up to 25 Duration in Years than 10 than 15 0 100.0 100.0 100.0 100.0 1 75.0 80.0 85.0 88.0 2 50.0 60.0 65.0 70.0 3 25.0 40.0 45.0 52.0 4 12.5 20.0 30.0 35.0 5 0.0 10.0 18.0 23.0 6 5.0 10.0 14.0 7 3.0 6.0 8.0 8 2.0 4.0 6.0 9 1.0 2.0 3.0 10 0.0 1.5 2.5 11 1.0 2.0 12 0.50 1.5 13 0.25 1.0 14 0.125 0.50 15 0.000 0.40 October 2004 Page 34
Unearned Premium Reserve as Per Cent of Single Premium Term of Policy in Years Completed Policy 5 or less over 5 and less over 10 and less over 15 up to 25 Duration in Years than 10 than 15 16 0.35 17 0.30 18 0.25 19 0.20 20 0.15 21 0.12 22 0.09 23 0.06 24 0.03 25 0.00 b) Renewable insurance policies, other than for homeownership, subject to the first premium not less than 1.25% (1.0% for conventional loans) of the initial sum insured and a renewal premium of not less than 0.25% of the sum insured issued for an initial term (or a renewal term) not exceeding five years: i) The unearned premiums will be maintained in accordance with the scale for insurance policies over five and less than 10 years in 4a above; and ii) The unearned premiums in respect of any renewal premium will be calculated prorata over the greater of the following periods: a) the renewal period; and b) three years. 5. Additional Policy Provisions A Foreign Insurer will maintain additional policy provisions as under: Completed Policy Duration in Years Additional Policy Reserve as Per Cent of Single Premium Original Term of the Policy Up to 5 yrs Over 5 to 10 yrs Over 10 to 15 yrs Over 15 to 25 yrs 1 2.0 3.0 4.0 4.0 2 1.0 2.0 4.0 4.0 3 0.5 1.0 3.5 4.0 4 1.0 3.0 5.5 5 0.5 3.0 6.0 6 0.5 2.0 5.0 7 0.0 1.0 3.5 8 1.0 2.0 9 1.0 1.5 10 1.0 1.5 11 0.0 1.0 October 2004 Page 35
Completed Policy Duration in Years Additional Policy Reserve as Per Cent of Single Premium Original Term of the Policy Up to 5 yrs Over 5 to 10 yrs Over 10 to 15 yrs Over 15 to 25 yrs 12 1.0 13 0.5 14 0.5 15 0.5 16 0.5 17 0.5 18 0.5 19 0.5 20 0.0 21 0.0 22 0.0 23 0.0 24 0.0 25 0.0 Note: For the purposes of this paragraph, the term of a policy for term 10 to 15 years described in paragraph 4(b) must be treated as 10 years. These factors are derived based on the assumption that the premium rates charged are adequate. Should these rates change over time, additional policy provisions factors will have to be readjusted. The AMF should be advised whenever a Foreign Insurer is making a material change to its rates charged. 6. Other Insurance Policy Durations Factors for calculating requirements of: a) mortgage insurance margin; b) Unearned Premiums; and c) Additional Policy Provisions at policy durations other than those specified in this Appendix are obtained by simple interpolation. 7. Premium Deficiency A Foreign Insurer will maintain a premium deficiency calculated as under for the different groupings of insurance policies. The premium deficiency in respect of a grouping of insurance policies will be the excess, if any, of: October 2004 Page 36
over a) the sum of the future claims and adjustment expenses, future servicing expenses and reinsurance costs; b) the Unearned Premiums. 8. Optional Settlement Clause a) The mortgage insurance margin required (as specified in section 3) will be adjusted for the settlement option specified in the mortgage insurance policy by the following proportion. Mortgage Loan to Original Value Settlement Option Factor Applicable to the Mortgage Insurance Margin 0 to 80% 10% 73% 0 to 85% 15% 80% 0 to 90% 20% 84% 0 to 95% 25% 100% 0 to 50% 100% 100% Over 50 to 65% 100% 100% Over 65 to 75% 100% 100% Over 75 to 80% 100% 105% Over 80 to 85% 100% 110% Over 85 to 90% 100% 115% Over 90 to 95% 100% 140% b) A Foreign Insurer may in respect of Homeownership loans issue policies with 100% coverage, subject to the following conditions: i) The Foreign Insurer will include in all such policies a clause giving the Foreign Insurer the option to pay claims on a deficiency basis without being required to settle the claim on the basis of the Foreign Insurer taking over title to the mortgaged property; and ii) At any time when the real estate holdings of a Foreign Insurer exceed 25% of its total invested assets, the Foreign Insurer will settle claims on such policies only on a deficiency basis, unless the Foreign Insurer has received written permission from the AMF permitting it to settle such claims on the basis of taking over title to the mortgaged property. c) For the purpose of this section, invested assets will include those that are required to be reported in the Annual Return, data points 20.10.01.01, 20.10.03.01 and 20.10.04.01 to 20.10.09.01, plus any other items that may be approved by the AMF. October 2004 Page 37
9. Date of Recognition of Claim Provision for losses in respect of mortgages in default will be made on the earlier of: a) the date five months after the date of the first default; and b) the date when the claim is submitted to the Branch. 10. Policies under which Premium Credits for Existing Policies are Given For the purposes of this Appendix, the Unearned Premiums and Additional Policy Provisions will be maintained based on the premium ignoring credits, if any, allowed for an existing policy. October 2004 Page 38
Insurer Year BRANCH ADEQUACY OF ASSETS TEST ($'000) Current Prior Available Assets Excess of Vested Assets over Net Liabilities 01 Receivables from Agents and Policyholders (including Brokers 03 Investments - Adjustment to Market... 05 07 (01) (02) Total Net Assets Available... 09 Margin Required Assets 20 Unearned Premiums/Unpaid Claims 22 Catastrophes 24 Reinsurance Ceded to Unregistered Insurers 26 Off-Balance Sheet Exposures 28... 30... 32 Margin Required 39 Excess Net Assets Available over Margin Required (line 09 minus line 39)... 89 Line 09 as a % of line 39... 90 Monthly pro-rata increase in Net Liabilitie Increase in Net Liabilities over prior year... 98 Monthly pro-rata increase (line 98/12)... 99 30.80
Insurer Year BRANCH ADEQUACY OF ASSETS TEST MARGIN REQUIRED FOR ASSETS ($000) Factor Book Margin (%) Value Required (01) (02) (03) Vested Assets Cash... 01 0,00% Investment Income Due and Accrued... 02 2,00% Investments: Term Deposits, Bonds and Debentures: - Expiring or redeemable in one year or less: Government Grade... 03 0,00% Investment Grade... 04 0,50% Not-Investment Grade... 05 4,00% - Expiring or redeemable in more than one year: Government Grade... 10 0,00% Investment Grade... 11 2,00% Not-Investment Grade... 12 8,00% Loans: Government Grade... 13 0,00% Investment Grade Loans, and Residential Mortgages... 14 4,00% Commercial Mortgages... 15 8,00% Other... 18 10,00% Preferred Shares: Investment Grade... 21 4,00% Not-Investment Grade... 22 15,00% Common Shares... 27 15,00% Investment in Real Estate... 30 15,00% Other Investments... 35 15,00% Real Estate for Insurer's own use 36 8,00% Total - Vested Assets 37 Other Admitted Assets (excluding Marine) Recoverable from registered reinsurers: - Unearned Premiums 47 0,50% - Unpaid Claims 49 2,00% Other (allowable) Recoverables on Unpaid Claims 51 15,00% Receivables: Policyholders (including Agents and Brokers): - Instalment Premiums (not yet due)... 54 0,00% - Outstanding less than 60 days... 55 4,00% - Outstanding 60 days or more... 56 8,00% 60 Total Margin Required... 89 30.81
Insurer (Date) REINSURANCE CEDED TO UNREGISTERED INSURERS (excluding Marine) ($'000) Premiums Claims Unearned Outstanding 10% margin on Payable to Non-owned Letters of Margin ceded incurred by premiums losses unearned assuming deposits held credit held Required to assuming assuming ceded to recoverable premiums and insurer as security as security (04+05+06 Name of assuming insurer insurer insurer assuming from assuming outstanding from assuming from -08-12-13) insurer insurer losses insurer assuming where recoverable insurer positive Affiliated (01) (02) (03) (04) (05) (06) (08) (12) (13) (17) Total Affiliated... 49 Non-affiliated Total Non-affiliated... 69 TOTAL BUSINESS... 89 Amount of letters of credit (line 89, column 13) that exceed the 10% margin (line 89, column 06)... 95 70.39
Insurer Year BAAT APPENDIX A-1 (thousands of dollars) WORKSHEET - MARGIN REQUIRED: ACCIDENT AND SICKNESS BUSINESS ($'000) Earned 01 Premiums 02 Margin 03 Factor A. Unearned Premium Margin (i) Disability Income Insurance Length of premium guarantee remaining Individually underwritten < 1 year 12,0% 1-5 years 20,0% > 5 years 30,0% Other < 1 year 12,0% 1-5 years 25,0% > 5 years 40,0% (ii) Accidental Death and Dismemberment Note (iii) Other Accident and Sickness Benefits 12,0% Total Unearned Premiums Margin 01 Factor 02 Margin 03 Unpaid Claims Relating B. Unpaid Claims Margin To Prior Years (i) Disability Income Insurance Duration of Disability < 2 years Length of benefit period remaining < 1 year 4,0% 1-2 years 6,0% > 2 years 8,0% Duration of Disability 2-5 years Length of benefit period remaining < 1 year 3,0% 1-2 years 4,5% > 2 years 6,0% Duration of Disability > 5 years Length of benefit period remaining < 1 year 2,0% 1-2 years 3,0% > 2 years 4,0% (ii) Accidental Death and Dismemberment Note (iii) Other Accident and Sickness Benefits 10,0% Other adjustments Total Unpaid Claims Margin Appendix A-1
Insurer BAAT APPENDIX A-2 Year WORKSHEET - MARGIN REQUIRED: OFF-BALANCE SHEET EXPOSURES ($000) Collateral Credit Possible and Conversion Margin Credit Exposure Guarantees Factor Factor Required (%) (%) Col. (01-02) x 03 x 04 (01) (02) (03) (04) (05) Structured Settlements: Government Grade 01 50% 0,0% Investment Grade 02 50% 0,5% Not Investment Grade 03 50% 4,0% Letters of Credit: Government Grade 10 Note 0,0% Investment Grade 11 Note 0,5% Not Investment Grade 12 Note 4,0% Derivatives: Government Grade 20 100% 0,0% Investment Grade 21 100% 0,5% Not Investment Grade 22 100% 4,0% Other Off Balance Sheet Items: Government Grade 30 Note 0,0% Investment Grade 31 Note 2,0% Not Investment Grade 32 Note 8,0% TOTAL 99 Appendix A-2
APPLICATION INSTRUCTIONS Subject: Branch Adequacy of Assets Test Date: October 2004 To: Foreign property and casualty insurers The Branch Adequacy of Assets Test (BAAT) will become effective in Québec in respect of financial statements ending after December 31, 2004. The Autorité des marchés financiers ( AMF ) is therefore asking foreign property and casualty insurers to complete the BAAT as presented in the P&C-2 annual return by using the Assets Adequacy Requirements Guideline published by the AMF. Moreover, in an effort to simplify matters for the P&C insurance industry, the AMF is asking insurers to follow the instructions that have been given to you by the Office of the Superintendent of Financial Institutions. Additional information from insurers that underwrite marine business may be requested by the AMF since the BAAT excludes amounts related to this insurance class.